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Home , Barbacena, Itutinga, Lavras

RETURN TO T.O.- Ila EPORTS DES** i {8RESTRICTED vw"HIN fILEwr ONE WEEK Public Disclosure Authorized

This report is restricted to use within the Bank.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Public Disclosure Authorized

TECHNICAL REPORT

on the

ITUTINGA HYDROELECTRIC POWER PROJECT Public Disclosure Authorized of the

STATE OF MINAS GERAIS

BRAZIL

July 3, 1953 Public Disclosure Authorized

Technical Operations Department Currency Equivalents

$1.00 - 20.0 cruzeiros 1 cruzeiro - $0.05 1 mUlion cruzeiros - $50,000. N.B. The above equivalents are based on the effective cost, including tax and commission, of buying dollars at the present official exchange rate. The free rate is about $1.00 * 40.0 cruzeiros. TABLE OF CONTENTS

Page No.

I. Scope of this Report . . ... 1

II. State Organizationfor Power Development 1

III.The borrower ...... *.. .. 1

IV. Descriptionof the Project ...... , 1

V. Engineering and uonstruction...... 3 VI. Construction:chedule 3

VII. Power llarket......

VIII. ConstructionCost ...... 5

IA. Fower kiates...... O , .. 6

X. Expenditures, Sources of Finance, Income and Cash Position .,.. ,.. ... 6

XI.l:ianagement ...... *....S...*...... 9

,II. Conclusions and Recommendations ...... 9

PYPPENDICESA, B, C -!1D D (1Lotes to -ppendixD) B R A Z I L

TTJTTUTG;LHlRO!L.CTRTC ?OW'71 ?RGJ"CT

STi,T' OF MI.'AS GBRAIS

?ROJ7CT ITO. 11

I. Scope of this ReDort

1. An anplication for a loan has been received from the 3razilian Govern- ment through the Joint Commissionto cover the foreIgn exchange cost for Uhe constructionof a hydroelectricpower project at Itutinga on the Rio Grande River in the southern oart of the State of Minas Gerais.

2. Tnis report presents an appraisal of the oroject with recommendations. It is based on informationobtained from the Joint Commissionand visits by Banikrepresentttives.

IT. State Organizationfor Power Develonment

3. The State Government in 10146started an ElectrificationProgram vrhich now involves the constructionof a number of electricpower plants including Itutinga.

4. In order to carry out this program, a number of laws were passed author- izing the Stete to orga.nizeand -certicipateiil "m.xed companies,' in w.Yhich shares nmy be held by the State and. by private iiltererts. The existing organi- zation operatingund.er these laws consisti of a Hol&ing Company and various subsidiarycompanies. The Holding Comoany, "CentraisElectricas de Minas Gerais S.A.,t (CEI:TG), which is at present Qublicly owned, is authorized to establish, manage, finance and eDrovid-e tech,ni.cal, accounting, legal and execu- tive assistance to its subsicl_.-ry companies. The latter are regional in character aned are designed to construct and operate electric power projects in the areas designated byorCI:TG.

ITT. The Borrower

5. C$MIG has established four subsidiaries inclucing the Comnanhia de Eletricidade do alto Rio Grande (CMhRG) which is executing the Itutinga. project.

6. The proposed loan would be made jointly to CD4IG and C7atRGas co- borrowers and guaranteedby the United States of Brazil.

IV. Descr5ptlon of the Project

7. The proiect consists of the constructionof a hydroelectric power plant with an initial capacity of 24,000 klcw,located at the Ttutin-a rapids on the Rio Grande River. It will be a run of the river plant with storage only for dail1yregulttion, Also included in the nroject is the constrlctionof the necessary transmission lines and distribution systems. - 2 -

&. Stream flow data are available for the past 17 years. These data show ttrat the avera& minimum flow gives a fi:m capacity of 24,000 kw at a 50, load factor, which is adequate for the market descrIbed hereafter.

9. The dam, which will provide t normal het.u of30 meters, will be of a composite design, the main part being of concr-'te. The spillway 4s aesi.gn- ed for a total discharge of more than double tI.e maximum recorded streart flow measured ovFr a period of 17 years. Two v.rtical turbines will be installed initiilly, each with a rated capacity of 17,000 horsepoler. The directly connected generators will each have a rtted capacity of 12,000 Int. The generators will be of a totally enclosed destin, permitting outdoor installation and therefore simolifying the design of the powerhouse strllc- ture.

10. The plant is designed to permit installationtf two more genecs.ting units at a future date. This work, howeverr,is not I part of the project now under consideration.

11. The outdoor substationwill be equipped.with si:-,single phase, 5,000 kva step-up transformersw!ith high tension taps :t 69 kv and 138 ,V. Switchingand control equipment will be of Conmentiona.design.

12. The generated power will be tranismittedby means "Paluminum cable over the following transmissionlines:

Voltage -Aoprcly. ynO Tower Branch KV LeanthKM Circu't Construction

Ttutinga-Lavras 69 40 Single Steel itutinga-S.Joao del Rey 138 1/ 45 Single Steel S. Joao del Rey-Barroso-Sitio 69 55 Double Wood Barbacena Branch 69 7 Single Wood Itutinga-iTazareno 69 2/ 25 Single Wood

1/ Will initially be operated on 69 kv. 2/ Wtill initially be operated on 13.8 kv.

12. The industrial consumers located in Barroso, Sitio and ilazarenowill install their owr. step-down substation equi-oment,while CEARG will construct sten-down substations as follows:

Town apa-' KVA

Lavras 2,5 00 S. Joao del Rey .(00 Barbacena 2,r00

14. The local utilities will reconstructand exoand their own distribution systems. - 3 - V. Engineering and Construction

15. The present plans for the constructionof the project prepared by C012RG, are based on engineeringstudies carried out by the Brazilian engineering firm Servix Engenharia, Ltd., in 1949 and by Burns and Roe Inc. of New York in 1951. The plans vwere revievred by the Bank's con- sultant, PMr. A. J. Ackerman, in October, 1952, who found the project wrell designed and complyingwrith basic principlesof economic development of the available water power.

16. At the time of the visit of the Bank's representatives,contracts had already been placed as follows:-

a) after comparison of bids from three U.S. suppliers,a contract had been signed in June 1952 with WTestinghouse for major equipment for the plant;

b) after comparisonof bids from tro of the principal civil constructionfirms in Brazil, a contract had been signed in April 1952 wTithCia. Iorrison Knudsen do Prasil, S.A., for the detailed engineeringand complete constructionof the power plant including the step-up substation;

c) following international bidding, a contract had been signed in December 1952 with General Electric for substation equipment.

The goods and services being provided above are suitable for the project and reasonablein price.

17. Orders for the remainder of the imported equipment are being placed on the basis of internationalbidding.

18. Constructionwork was started in iIay,1952, and is progressing as scheduled.

VI. ConstructionSchedule

19. The start and comnletiondates of the major parts of the project are estimated as followrs: Item Start Complete

Civil works May 1952 December 1954 Installation1, Unit April 1954 December 1954 Installation2. Unit April 1955 December 1955 TransmissionLines January 1953 December 1954 Substations January 1953 December 1954 Local Distribution January 1953 December 1956

1/ The second circuit of the Sao Joao del Rey-Sitio line and change- over from 69 kv to 138 'kvin the substationto be completedby December, 1956.

20. The constructionschedules appear realistic and are in accordancewith delivery dates promised at present by the suppliers of main pieces of equipment. - 4 -

VII. Povwer Market

21. The forecast of the power market is based on the sale of power to six consumers writh 80% going to three industries using doinestic resources, and the remainder to three public utilities.

A. Industrial Load

22. (a) Ferro-Alloy Plant at Antonio Carlos (Sitio)

The Plineracao Geral do Brasil, a holding company of the Jafet group, which owns and operates iron and manganese mines, steel mills and ferro- alloy plants, has made plans to constrict a new ferro-alloy plant at Antonio Carlos. These plans call for the initial installation of one electric furnace (6,000 kw) which w.ould be ready for operation in the beginning of 1955 to be followed by a duplicate furnace in 1957. The company vwould not undertake this venture without an assured source of powrer and accordingly entered into a contract vrith CEARGin February, 1953, for the purchase of electric power starting in 1955.

23. (b) Cement LiUll at Barroso

The mill, owned by Cia. de Cimento Portland, one of the leading cement producers in Brazil and ouner of a number of cement plants, is presently under construction and initial operations are scheduled to start in 1954. As in the case of the ferro-alloy plant, a contract has been entered into by CEARG and the company for the supply of 3,000 kmr of electric power in 1955 and 4,500 kvVin 1956. 24. (c) Tin I1ine at Sao Joao del Rey At the present time the powuerload is insignificant. However, explora- tion work now carried out by the Cia. de Estanho Sao Joao del Rey in the form of borings indicates there are large deposits of valuable tin ores that will make this a profitable mine operation in wihich case power demand would increase materially. B. Public Utilities 25. The plant will supply povwerto the utilities serving the small towns Sao Joan del Rey, Barbacena and Lavras. Two existing hydro powFrerplants in Sao Joao del Rey and Barbacena, each with a capacity of about 1,800 kv, will be kept in service after Itutinga starts operation. Diesel generating units in the three towns -rith a total capacity of 2,500 kh will be retired. Pow!erDemand 26. As may be seen in Appendix A, estimated powFerdemand increases from 13,000 kw in 1955 to the plantts full capacity of 2Lo,000 kwnrin 1958. This rapid loading of the plant v,ithin three years wiill depend almost entirely on industry. Itutinga, however, is located within the Volta Redonda, Rio and Belo Horizonte industrial comrplex. Industrial Dower in Rio is now being rationed and forthe time being new customers are placed on a wraiting list by the power company. Electric power rates in the city of Rio are higher than those wthich have been estimated for Itutinga. In Rio industrial powAiernow sells for about 29 centavox per kilowatt hour while corresponding rates at Itutinga should be about 19 centavos. -5-

27. The ferro-alloy plant would be the largest single customer. Should the power demand in this industry fail to increase as planned, then oower would be available for other types of industries. The steel industry, however, is being expanded to about twice its present capacityand this will require the need for additjonal ferro-alloys. The plant, by being near the ore and along the Central Railroad, would be well located and able to meet the new demands of the steel industry. W'se,accordingly, believe that industry will reach, and oossibly exceed, the power demands antici,tAed by 1958 and in any event not later than 1960. Should the load;ng of the plant be slower than expected,management could, 6uring the Interimperiod, adjust rates upward as provided by law to keep earnir.;sin line wliththose now estimated.

VIII. Construction Cost

28. The total constructioncost is estimated to be Crz. $ 320 million including foreign exchange expenditureseauivalent to USt7.3 million converted at the rate of US$ 1 _ Crz. $20. Of this total Crz. $20 PAillion,all in local currency,will be spent by the three local utilities for expansion of their distribution systems.

29. These costs, broken down by principal categoriesare as follows:

Total Local Currency Foreign Currency 1,000 1,000 Equivalent Crz.$ Crz.$ 1000o us $

CEARG - Main works 278,800 148,160 6,532 Overhead, etc. 3,000 3,000 Interest during construction 1J5360Q - 768

297,160 51x,l160 7,300 W;orkingcapital 2,84o 2,840 -

300,000 1 h CO 7"C0O

3 Munic-joalities Distributing systems 20,000 20,000 -

Grand Total 220,000 2IQCS_1_

-:O. The above estimateswere prepared by CEARG in February, 1953, taking into considerEtionrecommendations made by the Bank's Mission mainly with regard to the transmissionsystem. The-,are based on detailed target estimates made by the contractoras a basis for Itheconstruction contract, and., with the exceptiornof the transmissionline, on contractsplaced for equipment and materials. For the transmissionlines the estimate is based on bids received. The foreign currency costs include 20% escalation, ocean freight, interestand commitmentfees durrig constructionon the proposed Bank loan. The local currency costs include 15% contingency to cover anti- cipated local wage and price increases during the three year construction -6- period, but should this reserve prove insufficientit appears that CEMIG has ample funds to complete the project. As local funds will be made available by eq.ultycapital investment,no interest during constructionis included. A detailed breakdown of the constructioncost is given in Appendix B.

IX. Power Rates

31. The following rates for the sale of power are contemplated by CEARG:

(In Crz.$ per K'H)

Supplied at Supplied at Preferential Load Factor 13.2 KV 69 KV Seasonal Rates 1/

0.20 0.601 0.541 o.487 0.40 o.410 0.369 0.332 0.60 0.298 0.268 0.241 0.80 0.233 0.210 0.189 0.90 0.212 0.191 0.172 1.00 0.195 0.175 0.157 l/ Special rate during rainy season 69 kv supply

X. Expenditures,Sources of Finance, Income and Cash Position

32. The proposed methods of financtngare as follows:

Foreign Currency T^otalcost Equivalent 1,000 Crz.$ 1,000 US $ Plant, Transmissionlines & Substations

State's ElectrificationFund ]L3,C0- Private capital 11,000 - IBBRDLoan -146,000 7,30

Sub-Total 300,000 7,3CO

DistributionSystems

State Savings Bank 9,000 Federal Savings Bank 5,000 Own Resources of Local Utilities 6.00o

Sub-Total 20,000

TOTAL 320,000 7.3cO - 7 -

33. At the end of 1952, US4650,000 (Crz.$ 13 million) had been spent in foreign currency, and the financing statement shown ahove assumes that that amount, together with dollar expenditures made from January, 1953, to the effective date of a loan, would be reimbursed by the Bank.

34. The Bank Mission considered carefully whether the proposed methods of financing were realistic.

35. As far as the main plant is concerned the local currency requirements amountingto Grz.$154 million would be met by the issue at par of 61,600 preference and 92,400 ordinary shares, each of Crz.$ 1,000, as shown in Ap- pendix C. Some 11,000 shares have already been subscribedby private investors, and the balance of the shares is being subscribed by CEMIG and the State. The State of Minas Gerais levies an Economic RehabilitationTax of 1.4% on sales and similar transactions within the State, and 4/14ths of the proceeds of the tax is allocated to the ElectrificationFund and is being made available to CEMIGfor, among other things, the purchase of shares in CEARG.

36. However, as estimates of future tax yields are always somewhat uncertain, it is suggested that by a Project Agreement between the State and the Bank the State should guarantee that CEMIGshould receive as a minimum the sums estimated to be needed for its over-all program. By making the proposed loan to CEARG and CEMIG jointly the former should be assured of receiving all the capital it needs from CEMIG.

37. As far as the distributionsystems of the utilities are concerned, for which some CRZ.Q 20 million are estimated to be needed, the Federal Savings Bank has granted a loan to the city of Barbacena sufficientto cover not only its distributionsystem costs of Crz.$ 5 million, but also rehabilitationof some generating capacity. For t'heother Crz.;$15 million, the State Savings Bank has agreed in writing to make available Crz.$ 9 million and the remaining Crz.,p6 million is to be found from the local utilities own resources; a con- siderablepart is already available in liquid funds and uncalled share capital. The officials of CEARG and CEFIG have stated that they will assist the utilities in working out suitable financing plans, and both they and the munici- palities themselves are confident that the necessary funds will be obtained.

38. As a result of discussions with the Governor of the State and with officials of CEMIG and CEARG and representativesof the local utilities, we have no doubt but that adequate local currency funds can and will be found to enable both the main plant and the distributionsystems to be completed.

Future FiinancialPosition of CEARG

39. An estimated statementof source and applicationof funds has been prepared which shows the capitalmovements in the constructionperiod, and there- after estimates of annual profits and debt service, together with available cash balances for all periods. In this statement the proposed IBRD loan is taken as being for a term of 20 years, with 3 years of grace, and as carrying, for the purpose of calculationonly, an interest rate of 5% per annum. See Appendix D. - 8 -

40. The following points are of interest:

1. The company proposes to pay the maximum dividends it can, even at the expense of not increasing the cash carry forward until the end of the amortization period.

2. The cash carry forward barely provides for working capital.

3. The cruzeiro equivalent at the present official rate of the loan service appears to be covered.

41. The statement is based on the company's figures, but amended to allow for a higher interest rate for the Bank loan than that envisaged by the company. The principleson which the company proposes to operate are not changed.

42. From Note 2 to the Appendix it appears that the combined resources of CEARG and CEIIIG are likely to enable service on the Bank loan to be maintained, either by increases in tariff rates or from the general resources, including tax revenue, of the group.

43. Based on projections of pro-forma Balance Sheets as at the end of December, 1956 (when the first stage of the constructionwork should be completed), and 1960 (when revenues should have reached the maximum envisaged in the estimates)the IBRD loan would be covered by total assets 2.1 and 2.4 times at the respectivedates.

44. The position is set our below:

Pro-Forma Balance Sheets and Asset Protection of IBRD Loan

(Thousandsof Cruzeiros) As at December 31 1956 1960 1973

Original Fixed Assets - cost 297,160 297,160 297,160 less Depreciation* 5,469 20.363 108.940

Net original Fixed Assets 291,691 276,797 188,220 Current Assets 5.973 5,363 11.788

Total Assets 297,664 282,160 200,008

IBRD loan outstanding 143,220 118,380 -- Capital 154,000 154,000 154,000 Reserves and Surplus * 444 9 7gO46.008

297,664 282,160 200,008

Cover on IBRD Capital outstanding 2.1 times 2.4 times

* Depreciationand Surplus adjusted to amounts which would have stood to the credit of the depreciation reserve and surplus if annuity investment had taken place. 45. It should be noted that the asset protection position has been considered only on the assumption of a rate of excliange of Crz. `20 = US 1.

46. The position at 1973, when the loan has been repaid, is given as a matter of interest. The small amount of current assets illustrates the remarks made earlier regarding the company's policy on prytLent of divi~- dends.

47. From Note 2 to Appendix D it appears that the net revenues can cover the cruzeiro equivalent at the present official rate of exechangeof the debt service on the proposed loan and also leave available sur-plusfunds available for reinvestmentamounting to about LP of CEARG's share capital.

XI. I0anagement

48. The parent company, C&EiIG,has an experiencedmanagement which is in charge of the over-all program drawn up for the developmentof the hydroelectric resources in the State of Minas Gerais. It also has an adequate staff to provide its subsidiary companieswith managerial, financial and technical advice whenever needed.

49. CEARG as one of these subsidiariesis a well organized company with a management qualified to supervise the constructionof the project and to operate the Itutinga plant upon completion.

XII. Conclusionsand decommendations

50. The area served by the project is rather infertile with poor soils and the rate of economic developmentis largely determined by progress in mining and manufacturingindustries. Ample cheap power is of primary importance for such development.

51. Practically all forests in this area have been exploited, the wioodhaving been used as domestic and industrial fuel and in the makin; of charcoal for steel making purposes, Cheap hydroelectricpower will help greatly to alleviatethe growing shortage of fuel by permittingthe use of electric furnaces, eliminationof diesel engines ard by a greaterutilization of electricityby small industries and in the home.

52. The project is well planned. The constructionis being carried out by a company having experience in building similarprojects. i market for a major part of the pouer to be generated is assured by the contracts entered into by CE*XRGand the two main industrial consumers,which will make it possible to operate the plant near its maximum capacity. The production of ferro-alloys is important to meet the demands of the expanding steel industry in irazil. The production of cement will make it possible to reduce imports with a saving in foreibn exchange amountin- to the equivalent of about US8',million annually. - 10 -

53. The net revenues are estimated to cover the cruzeiro equivalent,at the present official rate, of debt service on the proposed loan and also to generate annually for CE2IIGand CEARGsurplus funds amounting to about 11% of CEPRG's share capital. A.tthe same time, however, it must be borne in mind that devaluationof the cruzeiro might create considerabledifficulties in meeting debt service, particularlyif the comparies, especiallythe parent company, had incurred too heavy a debt burden.

5h. it is necessary that provisions designed to maintain an appropriate ratio between the aggregate amount of their unimpaired capital, surplus and free reserves on the one hand, and of the aggregate amount of their long-term indebtedness on the other should be negotiated with CLIIG and CEARG. A ratio of one to one throu-hout the period of the loan would be appropriate. This may well take the form of a covenant restrictingthe incurring of indebtedness and the payment of dividends if thereby the ratio mentioned above would be impaired.

55. £he two companies, CEIIG and CEtRG, are well organized and are managed by men with experience in the constructiorn and operation of power utilities,

56. Since the project is technically and economicallyfeasible it could be the basis for a Lank loan equivalent to USe 7.5 million with a term of 20 years including a period of grace of 3 years,

July 3, 1953 APPENDIXA

ITUTINGA lARKETESTI.,LITE *

Generation in Million K1E

Consumers 1953 1954 1955 1956 1957 1958

Utilities Lavras Ov.ngeneration 4.6 .6 Itutinga 4.7 5.3 6.1 7.0 S. Joao del Rey Ov,m generation 12.0 13.0 8.0 8.0 8.0 8.0 Itutinga 6.8 8.9 11.0 13.0 Baroacena a0m generation 8.0 8.5 9.0 9.0 9.0 9.0 Itutinga 1.0 1.5 2.0 Sub-total 2L,.6 '26.1 28.5 32.2 35.6 39.0 Itutinga 11.5 15.2 18.6 22.0

Industries Ferro Alloy 22.0 44.0 88.0 88.0 Cement laill 18.0 27.0 27.0 27.0 TLinM1ine 1.0 2.0 3.0 3.0 Sub-total 21.0 73.0 118.0 118.0

Grand total 24.6 26.1 69.5 105.2 153.6 157.0

Itutinga 52.5 88.2 136.6 140.0

Demand in 1,000 1r

Consumers

Utilities Lavras Total demand 1.0 1.0 Itutinga demand 1.1 1.2 1.4 1.6 S. Joao del Rey Total demand 3.0 3.5 4.3 5.1 5.9 6.7 Itutinga demand 2.6 3.4 4.2 5.0 Barbacena Total demand 2.0 2.0 2.0 2.2 2.4 2.6 Itutinga demand .4 .6 .8 Sub-total 6.0 6.5 7.4 8.5 9.7 10.9 Itutinga demand 3.7 5.0 6.2 7.4

Industries Ferro Alloy 6.o 6.0 12.0 12.0 Cement h1ill 3.0 4.5 4.5 4.5 Tin LRine .2 .3 .6 .6 Sub-total 9.2 10.8 17.1 17.1 Itutinga demand 12.9 15.8 23.3 2h.5

As prepared by CE;.IIG and examined and approvred by Bank IMIission APPENDIXB

ITUTINGA PROJECT

CONSTRUCTIONCOST ZSTThATE *

Foreign Exchange Total Cost Local Currency Cost Equivalent Cost Plant 1,000 Crz._ 1,000 Crz6 1,000 US","

Civil lVTorks 135,000 106,000 1,450 GeneratingEquipment and Auxiliary 46,500 2,500 2,200 Switchgear 10,750 750 500 Transformers 8,750 750 o00 Sub-Total 201,000 110,000 4,555

TransmissionLines

Itutinga-Lavras 12,000 6,000 300 Itutinga-S.Joao del Rey 15,500 7,100 )420 S.Joao del Rey-Sitio 21,600 10,000 580 Sitio-Barbacena 1,100 860 12 Itutinga-Nazareno 3,800 2,800 50 Secondary Lines 6,000 6 000 - Sub-Total 60,000 71,362 Substations

Lavras 3,600 1,600 100 S. Joao del Rey 10,000 2,400 380 Barbacena-Sitio 3,700 1,300 120 Barroso 500 100 20 Sub-Total 17,800 5,400 620

Distribution

Lavras 5,000 5,000 S. Joao del Rey 10,000 10,000 Barbacena 5,000 5,000 Sub-Total 20,000 20,000

General

CEARG's overhead during construction and con- tingent items not covered by above 3,000 3,000 Torking Capital 2,840 2 840 Sub-Total 5,840

Total direct charges 304,640 174,000 6,532

Interest during construction 15,360 - 768

Grand-Total 320,000 174,000 7,300 * As prepared by CE1IIG and examined and approved by Bank 7qiission DIVIDZNDS DISTRIBUTIONCHART APPENDIX C

1955 1956 1957 1958 1959 1960 TotalDividend Crz.$4.106.666.7 9.240.000 12.320.000 15.400.000 16.940.000 18.480.000 Preference Shares (1,000 Cruzeiros each)

State 250 16.666.7 20.000 20.000 25.000 27.500 30.000 CEMIG 58.503 3.900.200.0 4.680.240 4.68o.240 5.850.300 6.435.,330 7.020.360 Private 2.847 189.800.0 227.760 227.760 284.700 313.170 341640 61.600 4.106.666.7 4.928.000 4.928.000 6.160.000 6.776.ooo 7.392.000 (6.66f) (8.00oo) (8.oo0) (10,00%) (11.00/%) (12.00i)

Ordinary Shares (1,000 Cruzeiroseach) C2MIG 83.878 3.914.306.7 6.710.2i0 8.387.800 9.226.580 10.065.360 Private 8.522 ,97.693.33 681.76o 85?.200 937.420 1.022.640 92.400 4.312.000 7.392.000 9.240.000 10.164.000 11.088.000 (4.66%) (8,00%f) (10.009) (11.00%f) (12.00*) Total Shares 154.000

Dividend on privatelyheld Ordinary Shares paid by State under guarantee 511.320 113.626.7 (6eiv) (1y33%)

Based on CEARG's schedule of proposed dividend payments. STAT4ERS'TOF 50URCJ ANC APPLICATION 0J FUNDS

(Expreseed in Cru2eiros - 000's omitted - except where otherwise indicated)

1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 to 1972 1973 (as for 1960)

I. o1pertion

Sales in million X[WE 52.5 88.2 136.6 140.0 154.0 162.0 162.0 Average Sales Price in Crz.$/IWE 0.267 0.261 02139 0.243 0.241 0.241 0.241

Revenue 14,000 22,300 32.600 34,100 37,500 39,000 39,000

Operating0j Costs 6.700 6,700 6.900 7,200 7.500 7,670 7.670 Depreciation 2 439 2.849 2.972 2.972 2.972 2.7272

Net Profit (before cbarging interest) 4.861 12zle a22-728 23.928 "7028 28.158

II. SouArce of ftnds

Available at beginning of period 6.0o3 5,971 6.SO1 5.15 S. 36i 5.363

Profit for year 4,861 12,751 22,728 23,928 27,028 28,358 28,358

add back depreciation 2.439 2.849 2,972 2.972 2.97 2 2.972 7,300 15600 25,70 0 30,000 31,330 31,330

Capital paid In by Sbareholders: for construction 47,000 26,100 40,060 21,490 16,510 for working capital 2,840 47,000 26,100 40,060 24,330 16,310

IBRD - Amounts drawn: for construction 54.858 41,547 29,805 4,430 for interest etc. during construction 1,142 4,453 6,195 3!,50 56,000 46,000 36,0OO 8.000

47,000 82,100 86,06o 67Z630 46,143 31,673 5 3.403 35.151 3663 36.623

III. Anolication of Junds

Construction - Foreign Currency 13,000 41,858 41,547 29,805 4,430 Local Currency 34,000 39,100 40,060 21.490 16,510 47,000 80, 958 81.607 51,295 20.940

IBRD loan: Interest and Commitment Charges * 1,142 4,453 6,195 Capital and Interest (average) C 9,990 ** 12,850 12,850 12,850 12,850 6,425

Dividends (see Note 1) 4,107 9,240 12,320 15,400 16,940 18,480 18,480

Available at end of period (see Note 2) 6,033 5,973 6.5o3 5.153 5,363 5,363 11,788 47,000 82,100 86,060 67,630 46.143 31,673 33,403 35.153 366_93 3,6923

IV. Relation of Revenue to Debt Service (see Note 3)

Net Income on cash basis before financial charges 15,600 25,700 26,900 30,000 31,330 31,330

Debt Service 6,430 *** 12,850 12,850 12,850 12,850 6,425

No. of times Income covers the equivalent at Orz.$ 20 to US$ 1 of Debt Service 2.43 2.00 2.10 2.33 2.44 4.88

' payments falling due on January 15 in any year have been treated as though paid at the end of the preceding year.

C included in this figure is the payment of the first half year instalment of debt service, Crz.$ 6,430(000), made up: Interest Crz.$ 3,650(000) and Capital Crz.$ 2,780(000).

CCC half year. NOTES TO STATELIENTOF SOURCEAND !SP2LICATIONOF FUNDS

Niote 1

The companyts policy to pay large dividendsis mainly the result of its capital structure and the breakdowvnof share holdings.

The company considers that in order to attract private capital in the future for new projects of CEM1IG,of itself or of other CLING subsidiaries, it should pay dividends as soon as possible, and rely on the State1 s guarantee of a minimum return of 6% to private investors as little as possible. CEARG points out also that over 90% of its capital is held by CELIG and that dividends paid to that company are not lost but available for the needs of the whole group, including itself. Mloreover,it is clear that the obligation to IBRD has priority and therefore,if it is necessary to assure the debt service, dividendswill not be paid; or, if they are paid, CELIIG-rill provide such funds as are needed for debt service.

Note 2

As has been seen, the financialpolicy planned by CEARG and CE,IG is that depreciationcounterpart funds will be used in meeting debt service, and that dividendswrill be paid up to the limit o^ cash availability,so that CEARGIs current assets T,ll not be built up over the period to 1973, wblhenthe amortization of the IBRD loan is to be completed. Clearly, therefore, CEARG would have no resources of its ovvnto employ in new construction.

On the other hand the holding company, CEIIIG,and the State of Ilinas Gerais, receive over 90% of the dividends declared by CSARG. By 1960, when the plant should be wTorkingat its full firm capacity, the dividends declared are estimated to amount to 12%oon share capital and it is expected that this rate will continue in the future.

The part of the dividendspaid to private persons may be considered as not available Lor new investment. CEM1IGand the State should receive as dividends about Crz.j 17,116,000a year, equivalentto about 11% on the total share capital of CEARG. It appears that these State interestswoculd receive some Crz.,'293,500,000 in the 19 years 1955 to 1971'inclusive (an amount equivalent to about 190" of the original share capital), rhichcould be used, subject to such small part as CE.,IGmight have to pay in dividends to its ovrn private shareholders,for new constructionin the State.

After 1973 the funds previously used by CEARG to pay debt service should, on the most conservativebasis, be used principally to build up liquid funds as counterpartto the depreciationreserve, and only a small part could, on this basis, be used to increase dividends.

It wirouldappear, therefore,that the earnings of the plant should be sufficient to finance each year an amount of new constructionequalling some 11% of the original share capital in the first thirty years or so. -2-

Iiote3

As the interest during the constructionperiod is covered by the loan itself, availabilitiesof revenue are consideredonly for the period from 19'6 onward, and as this revenue is to cover the total debt service (interest and capital combined, a constant annual figure wAThichat the present official rate of exchange is the equivalent of Crz.`.12,850,000) no sets of figures showing revenue cover against interest and capital separately seem necessary.

As CEARG can suspend dividend payments it is felt that the basis shown represents the true revenue cover. (Although if CEARG pays no dividend, or less than a 6% dividend, the State has to provide funds so that the private shareholdersshall receive the minimum of 65 on their holding-s.)

In the statementa rate of exchange of Crz,$ 20 = US.?1 has been assumed. A free exchange market has nowtbeen establishedin Brazil; the present free rate is about Crz," 40 = US$,1. IUhileit is understood that a utility such as CEARGw-ill be able to obtain dollars to cover debt service on a foreign loan at the official rate, the possibility exists that it might in the future be forced to buy dollars at the free rate. This, by increasing the cruzeiro cost of IBRD debt service, wfouldreduce the revenue cover for that service. In the case of CEARG adoption of"the present free rate vould reduce the cover (assumingno dividends to be paid) for 1960 and subsequentyears to 1.22 times, and debt service wnouldjust be covered if the rate of exchange fell to Crz.%.!9 to US:`1.

In these circumstancesit is necessary to consider whether the company would have a legal right to obtain increases in its tariff rates such as would enable it to meet the IBRD debt service. A study of the law applicable to electric power companies indicates that the Federal authority, when fixing or revising tariff rates, is required to take into account the need for safe- guarding the com-pany'sfinancial conditionand for enabling it to meet its debt obligationsincurred for purposes of acquiring fixed assets.

So far the position has been consideredfrom the business standpoint that the operating company should pay its oimnway. In the event that this company could not meet the IBRD debt service then the obligationwould have to be assumed by the parent company CEIIG. As mentioned earlier in this report, CEI;IGcan draw on the ElectrificationFund derived from the Economic Rehabilita- tion Tax of the State of Minas Geraisl/andit seems likely that from this source CEiZIGcould maintain service on the Bank loan.

G CEMIIGtsrevenues from this source are estimated to rise from Crz."i132 million in 1953 to Crz."l192 million in 1956, equivalentat the official rate of exchange to ten, rising to fifteen times, the debt service payable each year from 1957, Belo Horizonte BELO rORIZONTE

, 9a Rio de Janeiro

£, wConselheiro X,,+)GTLafoiete

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% Cr \)~~~~~~~~~~~~~~~Carlos I TUTINGAH.E. PLANT